• / Free eNewsletters & Magazine
  • / My Account
Home>Research & Insights>Investment Insights>Our Outlook for Health-Care Stocks

Related Content

  1. Videos
  2. Articles
  1. Holding a Finger to the Job Market Headwinds

    We examine the possibility for higher normalized joblessness, the concerns over long-term unemployment , changes in job-sector composition, and what can possibly catalyze job growth.

  2. Little Chance for Big Improvement in Employment Market

    Job growth hasn't even been close to the rate needed to hit the Fed's target for unemployment below 8%, says Morningstar's Vishnu Lekraj.

  3. Arnott: Look Outside Mainstream Stocks and Bonds

    Investors need to broaden their horizons and consider alternatives and tactical bets if they want to achieve respectable returns in the coming years, says Research Affiliates' Rob Arnott.

  4. Feinberg: Quality Franchises Will Be Key for Stock Investors

    Owning high-quality companies will be integral to achieving growth in a low-growth environment, says the Davis/Selected American manager.

Our Outlook for Health-Care Stocks

While we remain bullish on the sector, health-care growth depends on the economy.

Morningstar Analysts, 09/29/2011

--Weak patient volumes are likely to persist, providing a headwind for most health-care companies. Nonetheless, thanks in large part to easy comps and a weak dollar, our forecast calls for moderate revenue and earnings growth. 

--Changes on the regulatory landscape could threaten device companies. Damage, however, is likely to be less punitive than what the market anticipates, and device stocks present compelling investment opportunities.

--M&A activity is likely to remain strong as health-care firms are flush with cash. We are somewhat skeptical that the Medco/Express-Scripts deal will gain regulatory approval.

Resilient Unemployment Levels a Key Culprit to Low Patient Volume  
This may sound like a broken record, but the return of demand for non-acute health-care services appears to be directly tied to the improvement in the macro environment. A fairly muted economic recovery and stubborn unemployment levels have so far successfully suppressed any sort of pickup in demand for health-care services (particularly against the backdrop of the easy comps of 2010).

With a larger portion of total health-care costs borne by a patient (due to the sizable number of uninsured individuals as well as a trend toward greater out-of-pocket costs for commercial insurance plans), demand for health care has become more cyclical than in the past. A significant boost to consumer sentiment and a reduction in unemployment will be seemingly necessary to see a recovery in health-care consumption.

Hospital patient volume is a key barometer of consumer sentiment as it pertains to health care, and the numbers weren't encouraging in the second quarter: The adjusted admission growth among the top publicly-traded hospitals clocked in at a pedestrian 0.3% year-over-year increase. Moreover, surgical procedures (both inpatient and outpatient) have barely moved so far in 2011 despite a drastic volume decrease seen in 2010, mainly as a result of the continuing deferral of elective procedures. This dynamic has lasted much longer than we were anticipating, postponing recovery for many firms reliant on surgical procedure volumes, particularly orthopedic device makers that count on elective procedures for the bulk of their growth. A weak patient volume also manifested itself in stagnant demand for preventive care: Diagnostic test volume in the second quarter and year-to-date reported by both Quest Diagnostics DGX and LabCorp was virtually flat year-over-year.

Weak volume is one part of the equation, but similarly weak pricing has also factored in the overall lackluster growth. A payer mix tilted toward Medicaid is the main culprit: As Medicaid tends to be the "stingiest" payer and membership in this program remains at historically high levels, the P component of the total spending equation remains depressed.

We have seen some positive signs, coming mainly from improving year-over-year commercial insurance enrollment trends (albeit aided notably by easy comps). Commercial enrollment growth tends to lag reductions in unemployment; with unemployment levels below the peak, commercial membership grew 1.2% year-over-year in the second quarter. While a positive, that number isn't overly inspiring, considering that total commercial enrollment was down 4% from its peak in 2006 to 2010, according to the Census Bureau.

©2017 Morningstar Advisor. All right reserved.